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Kodiak Oil & Gas Is Still Growing Strong

Here's what you need to know from Kodiak's quarterly sales update.

Kodiak Oil & Gas(UNKNOWN:KOG.DL) recently provided its quarterly sales update to investors. This pre-earnings report is always a good first look at how the quarter is shaping up for the fast-growing oil company. Let's drill down into the report and see what's new at Kodiak.

Production updateKodiak announced that its first-quarter sales volume is up to 21,700 barrels of oil per day. That's up 105% quarter over quarter, and up 19% over last quarter. One thing to point out is that this is still well below the 29,000-31,000 barrels of oil per day of average production the company is expecting this year. That means that there's a lot more growth to come.

Overall, Kodiak is still a smaller Bakken producer. Its production is well below top producer Continental Resources(NYSE:CLR) which saw an average of almost 68,000 barrels of oil per day last quarter. However, Kodiak is growing its production a lot faster as evidenced by its triple-digit, quarter-over-quarter, production growth.

Growth update Kodiak has several wells moving into completion and all are on track. During the first quarter the company participated in the completion 18 net wells and it intends to participate in the completion another 23 net wells in the upcoming quarter. These wells will add to Kodiak's sales as they come online over the next few months.

For the full year, Kodiak is planning to drill 75 net wells at a cost of $740 million. The company is well on its way to that goal, which when complete should easily enable the company to hit its 2013 production goal.

Balance sheet updateKodiak had its semi-annual credit facility redetermination and the lenders agreed to increase the company's borrowing base from $450 million to $650 million. However, the company elected to limit it to $550 million. With just a hundred million in current borrowing, Kodiak believes that it has more than enough funds when combined with its projected cash flow to fund its capital spending plans for this year. Kodiak isn't yet cash flow positive, but it continues to get closer.

One area the bears are watchingTucked in Kodiak's release is notice that the company completed the drilling and equipping of three disposal wells in the quarter. The company noted that these wells are part of an ongoing effort to reduce its operating costs. It has earmarked $35 million of capital for water disposal systems, well connections, and smaller acreage acquisitions.

Other than the potential to cause earthquakes, disposal wells are not the best solution for all that oily frack water. The industry as a whole needs to do a better job of treating and recycling frack water, and companies like Heckmann(NASDAQOTH:NESC) are at the forefront of providing that solution. While it's not the cheapest solution, it is a full-cycle environmental solution which is something the industry needs to embrace in order to clean up the image of fracking.

Not only do investors need to watch how Kodiak handles its wastewater, but the company also flares a lot of gas. While profitability is important, the company needs to keep its environmental footprint in mind. It needs to strike a better overall balance between profitable growth and being more environmentally conscious.

Foolish bottom lineKodiak made very good progress in the quarter and remains on pace to accomplish its goals for 2013. The next thing investors should be on the lookout for is the company's earnings report. That report is expected to be released on May 2.

Motley Fool contributor Matt DiLallo owns shares of Heckmann and has the following options: Short Jun 2013 $4 Puts on Heckmann. The Motley Fool owns shares of Heckmann and has the following options: Long Jan 2014 $4 Calls on Heckmann and Short Jan 2014 $3 Puts on Heckmann. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo